Pilarski fuels debate on oil prices

What’s fuelling debate among the industry’s key players? The clue is in the question, and the answer is fuel. Oil guru and SVP at Avitas, Adam Pilarski, stepped up to address the issue at the International Society of Transport Aircraft Trading’s (ISTAT) event in Pheonix on Tuesday (March 10).

While the industry celebrates low fuel prices, it’s also wary of becoming reliant on them. Fortune is fickle and not least with fuel. Opinions on how long these low prices will last are certainly divided. While the secretary of OPEC said prices could exceed $200 per barrel, Pilarski noted that Saudi Arabia, which produces 30 per cent of OPEC’s oil, could keep supplying the black stuff at low prices for as long as two years.

While the analyst delivered his message with his renowned comic aplomb, he raised serious concerns, notably the risk from numerous political tensions, which could severely affect oil supply in either direction.

Middle Eastern suppliers have shrugged off OPEC’s concerns about supply, suggesting they’re happy to deliver large quantities of oil at low prices. And contrary to what some say, Pilarski argued that on a global level we are not running out of oil.

Added to that are political tensions in Syria, Russia, Iraq and Iran, plus deflation, which is particularly serious in Europe. We are, he says, in a bubble surrounded by high levels of risk on all sides.

However, he does not expect to see oil prices exceed $100 a barrel for quite some time. What will this mean to the industry? While not delving into the subject, Pilarski said “big changes will happen” to lease and market rates as well as retirement rates and ages.

More specifically, GDP will rise, creating more disposable income, which passengers can use to travel. According to the analyst, GDP rises by between 0.1 and 0.4 per cent for every 10 per cent decline in fuel prices. As GDP climbs, passenger numbers climb, then, says Pilarski, ticket fares will drop.

Some analysts have suggested that airlines will use fuel cost savings to bolster their balance sheets. Indeed, in a poll of the delegates quizzed during the first day of the conference, the majority (45 per cent) believed airlines will invest savings instead of passing them to their customers or shareholders.

However, Pilarski said: “I can’t understand any analyst who says airlines won’t reduce ticket prices.”

He argues that so long as supply and demand remain the same, you can lower costs and still fly the number of passengers needed to make the right return.

He responded to Richard Anderson, CEO of Delta’s quote to the media that you should plan for high fuel prices so that you’re pleasantly surprised when they fall as “not conservative, but stupid” – although he quickly added the caveat that Delta is a great airline.

However, in a later panel, Ron Baur, VP of fleet for United Airlines said he also takes a conservative approach regarding the effect of low-fuel costs on fleet acquisition and that the airline hasn’t adjusted its plan due to low prices.

Jose Yunda, fleet management director at Avianca, said: “Fuel cost is important to us but we don't make fleet decisions on this alone.” He added that of the other considerations, MRO cost considerations are the most significant.

“Long-term decisions on aircraft really can’t be taken on short-term fuel price changes,” surmised Phil Seymour, chief operating officer of IBA Group. But, that’s not to say it won't have an effect.

In periods of high-fuel prices, operators clamour for new, fuel-efficient aircraft. With today’s prices they’re more likely to retain older aircraft and lease used aircraft to increase capacity for short periods.

“Airlines are consistently coming to us for used aircraft to manage their capacity,” said Edward O’Byrne, chief investment officer of AerCap.

Supporting this view, Daniel Pietrzak, MD of aircraft transactions at Delta, said: “Pursuing a used strategy and a new strategy means we can play one off against the other.” And this creates flexibility.

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